Small Businesses Not Adding Workers Like They Used to

It’s well known that job growth has been lacking in this recovery. One reason for the disappointment is that small businesses aren’t adding workers like they used to.

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Economists at Goldman Sachs explored the shift in hiring by business size using the Labor Department‘s Business Employment Dynamics survey. Although the BED data lag, the Goldman economists found small firms (defined as businesses employing less than 1-49 workers) have indeed underperformed medium and large companies whether underperform is defined as “a slower rate of job growth during the recovery relative to other firm size classes or a failure to regain the absolute magnitude of job losses incurred during the recession.”

These trends contrast with the last business cycle of the early 2000s. Small firms barely lost any jobs in the 2001 recession and then outpaced medium and large firms in the expansion.

First, small firms account for a disproportionately large share of construction jobs and those payrolls collapsed during the Great Recession.

Second, labor markets have seen a structural shift toward large company jobs. For instance, Goldman notes large companies’ share of retail employment has jumped 16 percentage points from the early 1990s to 64% today. Many mom-and-pop stores can’t compete against big box retailers.

Lastly, large-business employment has tended to be more sensitive to the business cycle. When the U.S. recovery strengthens, big firms benefit a bit more.

Looking ahead, the Goldman Sachs economists say these factors argue that small-business hiring won’t outperform larger enterprises. But small firms will see positive hiring, especially as the housing recovery benefits small construction companies. Those jobs should be plus to overall payroll growth.

The laggard pace of small-firm hiring this recovery is echoed in the ADP September private-sector data. According to ADP numbers, payrolls at private firms with less than 50 employees have increased 4.7% since the end of the recession through August, medium-size firms (50-499 employees) are up 6.1% and large firms (more than 1,000 workers) have increased payrolls by 7.4%.

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